Can Micro Plans Be Profitable?
While advisers’ skills are much needed, can the business be profitable? Research consistently shows advisers’ defined contribution (DC) skills are badly needed among small-business plan sponsors, especially when it comes to bringing “micro” plans into alignment with the best practices widely adopted by these plans’ larger counterparts. Source: PLANADVISER.com
Key Questions Around Micro Plans:
What plan asset range is considered ‘micro’?
“Plans with <$20 million in plan assets are a ripe segment for advisors looking to add new clients… some people in the industry may view that as too high to be considered a ‘micro’ plan, but we see some compelling evidence that this is the milestone under which many plans are still run by HR generalists” (Benjamin Lewis, Senior Managing Director, TIAA Boston).
Why might an adviser shy away from this market initially?
Advisors may have concerns around profitability and/or the plan sponsor’s willingness to adopt plan design provisions and governance best practices.
What does a micro-plan sponsor primarily want from an adviser?
According to Lewis, “first and foremost, these small-business clients want the advisor to provide simplicity and efficiency.”
“[Plan sponsors] want the plan to run smoothly without requiring a ton of daily work on their end” (Lewis).
What sort of opportunity exists in the micro market?
According to the 2015 PLANSPONSOR Defined Contribution (DC) Survey, plans <$5 million in assets lag behind their peers in the incidence of practically all of the plan design metrics tracked (specific statistics provided in the full article).
“Over 650,000 individual DC plans exist right now in the U.S., and a vast majority of them are micro plans…especially when we drill down to under $10 million or under $5 million (in plan size)…” (Jason Roper, Divisional Vice President for MassMutual Retirement Services).
Jennifer McPhearson Frantom, Vice President, alliance business at ADP Retirement Services, states that they see “many one-and-done advisers [with] only a small handful of plans, indicating that a good chance exists that the quality of service could be significantly improved by a truly professional DC adviser.”
What about pricing in the micro arena?
“It is critical to be able to clearly state what your services are and how fees are being assessed– and not only that, but to show that a strong value is being delivered for the fee…just like in the mega market, the lowest price is not necessarily the best price” (Roper).
According to the 2016 PLANADVISER Micro Survey, “sponsors and/or employers in the micro market pay all of the costs of recordkeeping and administration directly 47.1% of the time… it increases to 59.2% for plans at $1 million or less in assets. This may ease concerns about upping participant fees…”(Roper).
A a stated ‘Key Takeaway’ from the article, the micro market “offers advisers an opportunity to create standardized services and to leverage trusted recordkeepers, third- party administrators (TPAs) and other vendors to maximize return on clients’ benefit spend.”